This article is sponsored by Digital Colony
The resilience of the world’s digital infrastructure is in the spotlight. But what are the fundamental long-term drivers that make this an attractive asset class?
If you look back to the 1990s, when mobility was just starting to take off, mobile phones were viewed as niche products reserved for businessmen and the most affluent in society.
As we transitioned into digital networks, 2G and 3G mobiles became personal communications devices. They became more resilient, and certainly more accessible, and so the infrastructure that was bound to that became more mission-critical. Now, we have transitioned once again, and mobile phones are far more than just personal communications hubs.
With the proliferation of applications and content and other OTT platforms, and with the advent of cloud computing, supporting digital infrastructure is having to step up. In order to make all of this work, and to keep the digital economy moving, significant investment is required across fibre optic networks, data centres, mobile towers and small cell infrastructure. Each of these four verticals is underpinned by customers that are enabling the content and applications – everyone from Netflix, to Facebook, to Google, Microsoft, Amazon and Vodafone.
It is the durability of the contracts that we enter into with these customers, and the quality of those cashflows, together with the fact that this is absolutely and increasingly an essential service, that make digital infrastructure, as an asset class, so unique.
How are your customers’ demands changing in response to covid-19?
At this inflection point – at this moment of volatility – none of the 15 digital infrastructure businesses we own and operate globally are retreating. They are actually growing.
We are seeing increased demand for everything from fibre, to antennas on towers, to small cells on street corners. We are selling more dark fibre and more lit fibre to provide the additional bandwidth required at this difficult time.
As people increasingly work from home, of course, and as more commerce and education are conducted from the home, workloads are being pushed further away from the urban core. That is a major paradigm shift and it is causing networks to become congested.
In turn, that is pushing our businesses to respond by providing additional infrastructure. The fact that our businesses are not only holding up, but actually growing, reflects both the durability of the model but also the mission-critical nature of what we are doing.
How did you prepare your own portfolio for the current situation?
Capital preservation is, of course, important. But what I have found in my 26 years of being a CEO is that these moments of anxiety and market volatility are when our customers need us the most.
Back in January, when the pandemic started to ramp up, we were getting ourselves prepared. We put in place a covid-19 response programme to ensure the safety of all our employees and assets. Once those home networks were set up – and being a digital infrastructure company, as you can imagine, most of our employees work remotely anyway – we could really start focusing on ensuring that we could service our customers.
The second thing we did was shore up our balance sheets. Our first debt maturity isn’t due until 2023 and most of our debt maturities are in 2024 and 2025. Having that long ramp to enable us to think long-term about how to serve customers is important.
We also don’t have a lot of leverage on our companies – around 5.9x across the entire portfolio, with a loan-to-value ratio of 48 percent. Making sure the businesses are under-levered and can therefore sustain any potential negative impact is critical.
Then there is ensuring sufficient liquidity. We have $3.8 billion of liquidity down at the portfolio company level, through access to cash on the balance sheets, undrawn commitments around debt facilities and future equity commitments from the fund and co-investors. It is essential to have the businesses protected, and with sufficient liquidity to play offence.
A combination of strong liquidity, low leverage, customer focus and good preparation is allowing us to move forward, to continue to work and to do deals.
M&A markets have dried up, for the most part. Are you saying it is still possible to make deals happen in the digital infrastructure space?
We have been incredibly busy and have an extremely active forward pipeline and a number of deals that we expect to close on in the near term. In early April, Digital Colony further grew its presence in Europe with the expansion of Vantage through the acquisition of Next Generation Data, and in early March, we acquired Zayo for $14.3 billion.
There are probably over 20 deals in the deal team’s purview, at the moment, in terms of new ideas, and then around another 50 deals on the radar at a portfolio company level.
Critically, we have been able to work with our banks to continue to finance transactions. What we have been hearing in the GP community is that a lot of deals are being shut down due to a lack of financing. But having 26 years of relationships in digital infrastructure has enabled us to get to the front of the line.
Why do you think experience matters even more with digital infrastructure than other sectors?
The customers that we work with are highly sensitive to their networks. Working with the likes of Amazon, Google or Microsoft is a privilege but also a significant responsibility. Meanwhile, building mobile networks for the likes of Vodafone, Verizon or Telefonica is tough work.
We wake up every day knowing that our infrastructure has to operate to 5-9 standards 24/7. If you are unable to do that and if you cannot manage these networks in such a way that they are reliable and resilient, then it doesn’t matter how much capital you have raised as a GP, you won’t get a second chance. Second chances aren’t something that come easily in our sector.
Once the immediate spike in demand driven by covid-19 subsides, what impact will the advent of 5G have on the digital infrastructure industry?
5G is undoubtedly a real catalyst, because it is going to enable what we call the Internet-of-Everything. Today, there are around 2 trillion devices that are on networks globally. Over the next five years, we see that market growing to 7 trillion devices. That is a significant step up in terms of usage and in terms of demands on mobile infrastructure.
What is also critical to carriers and to customers in a 5G world is this notion of latency – the speed at which a signal transmits from a device, to the antenna and then to the switch, or data centre, where the application resides. Increasing that speed and reliability is paramount. But so too is reducing the amount of power that emits from the antennas themselves. 5G will dramatically cut electromagnetic emissions.
So, we can safely say that 5G isn’t spreading the coronavirus?
The idea that 5G is spreading the coronavirus, as propagated in the UK in April, is – in the words of one British official – “absolute rubbish”. Anyone who does their homework on 5G will discover that more antennas and more fibre connected to those antennas will result in shorter distances between devices and the actual network, meaning the communications signal requires less power. Power is what creates electromagnetic emissions. So, we really do need to do some myth-busting around the world.
Not only will 5G reduce the total amount of electromagnetic emissions, it will also be better for the environment – because less power will be used at each antenna site – and will create a better user experience and more reliable networks in the future.
What role will digital infrastructure investors have to play in creating these 5G networks?
It is going to take us the next five years to build these networks. More fibre will be required to connect to the antenna sites. More tower sites themselves will be needed, as well as small cell locations. We will certainly also need more data centres, where the AI to increase the quality of these networks will live.
But not only do we, as investors, have to think about providing the towers and small cells to amplify and replicate signals, we also have to start thinking about where the radios are going to sit, and the intelligence behind those radios and the applications behind that intelligence. That is where we are starting to see ecosystems develop.
Historically, when someone built a mobile network, they just put a radio at the bottom of the tower. Fibre then ran to a switch where Ericsson or Nokia had their equipment and that ultimately went to an interconnection facility that connects to everyone’s networks. Now we are talking about a more distributed network and we are going to start hearing the anacronym CRAN – or cloud radio access network – more frequently.
This is where carriers are putting a series of radios at points of aggregation in data centres, surrounded by a series of applications. In the US, a lot of the big mobile carriers are already beginning to partner with cloud players. AT&T announced a huge partnership with Microsoft at the end of last year. Verizon has announced a partnership with Amazon. And we will see more. The likes of Vodafone, BT, Deutsche Telekom and Telefónica are all starting to think about forging alliances because a lot of the intelligence behind 5G networks will sit in the cloud.
Is this where edge computing comes in?
To make all this happen, we will need more hyperscale data centres and we will also need edge computing. Edge computing is where we start to see these points of aggregation – where you have 10 or 20 radios from mobile operators, together with the AI driven by the original equipment manufacturers such as Nokia or Ericsson.
That intelligence will ultimately connect to the content players like Netflix, Amazon, TikTok and Twitter. We will begin to see these ecosystems evolve on the edge of the network where there will be this collision of mobile radio intelligence, connected with content, connected with public safety and connected with AI.
These networks are going to look very different to the networks we have today and the key enabler to that change will be new digital infrastructure.
Surviving lockdown: Vantage Data Centers
Vantage is a Digital Colony portfolio company that focuses exclusively on hyperscale data centres, working with customers requiring 1MW of power and above.
Vantage’s customers are experiencing significant growth at the moment and the company’s ability to keep up by building facilities where the cloud resides is seminal to its success.
“In addition to its hyperscale data centres in the US and Canada, Vantage is now expanding rapidly in Europe, having formed a joint venture with our $4 billion infrastructure fund,” says Ganzi. “The firm has announced $800 million of equity investment, together with $800 million in debt, to target the buying and building of hyperscale data centres across markets including Amsterdam, Frankfurt, Milan, Zurich, London and Warsaw. This data centre expansion is critical to supporting heightened demand for content and applications during the pandemic and as demand continues to escalate long-term.”
Surviving lockdown: Zayo Group Holdings
Digital Colony portfolio company Zayo is the largest provider of dark and lit fibre in the US and Europe, providing the connectivity that enables traffic to move across long- and short-haul networks – networks that are obviously under enormous pressure to cope with additional demand as the covid-19 pandemic continues.
Zayo leases dark fibre to carriers and also sells that capacity and lights it up for customers such as Amazon, Google or Facebook.
“I like to say Zayo is the connective tissue that binds everything together,” says Ganzi. “It has the ability to transport data between an enterprise and a data centre, or a data centre and a mobile carrier. The company has 135,000 miles of fibre running across the US, much of it able to deliver a massive amount of bandwidth in a very short amount of time.
“Why is that so important now? Because customers are literally running out of capacity as demand is being pushed out of central offices to the home.”
Video-conferencing facilities from Zoom to Microsoft Azure to Amazon Chime, in particular, are being pushed to their limits, while demand for content and applications on laptops and on tablets is also soaring.
“As you can imagine, customers are asking us for more capacity,” Ganzi says. “Spot bookings, where customers want fibre provision lit up immediately, have increased dramatically, with everyone from web-scalers to content providers to cable companies and mobile operators requiring more bandwidth. We are dialling up that capacity as fast as we can.”